What is a documentary credit?

A documentary credit constitutes a commitment by a bank on behalf of the buyer (the principal/importer) to pay the seller of goods or services (the beneficiary/exporter) a specified amount immediately (sight) or at a later date (forward) subject to the presentation of stipulated documents within a prescribed period of time. The documentary credit is both a flexible means of effecting payment and a short-term financing instrument.

Are there differences between the terms "L/C", "D/C", "Letter of Credit" and "Documentary Credit"?

Can the documentary credit replace a sales contract?

No. Documentary credits, by their nature, are separate transactions from the sales or other contracts on which they may be based (UCP Art. 4). Any complaints or disputes therefore have to be settled directly between the buyer and the seller outside the documentary credit. The documentary credit is an instrument designed to reflect the payment and delivery terms specified in the sales contract.

Isn't a documentary credit an expensive and complicated way of doing business?

Compared with a delivery on open account or a down payment, it is more time- and cost-intensive. On the other hand, the fact that delivery and payment occur concurrently offers the exporter and the importer maximum security.

The proper handling of documentary credits is time-consuming and labour-intensive for the banks involved. However, these costs have to be seen in relation to the resulting benefits and security.

From what amount is it worth using a documentary credit?

Does the documentary credit also cover the quality of the merchandise?

No. In documentary credit operations all parties concerned deal with documents and not with goods, services and/or other performances to which the documents may relate (UCP Art. 5). To ensure goods are of the required quality, arrangements can be made for them to be inspected before despatch by an independent agency. The terms of the documentary credit may stipulate the provision of an inspection certificate.

What instructions must the exporter give the buyer to ensure he obtains a documentary credit confirmed by UBS and hence the assurance that payment will be forthcoming?

The terms of payment set out in the underlying contract should provide for the issuance of a confirmed documentary credit. Based on this provision, the applicant (buyer) will request the issuing bank to have the documentary credit confirmed by the exporter's bank (= UBS). For the seller, it is however advisable to enquire from UBS beforehand whether such confirmation is possible (due to the bank and country limits in place) and how much it will cost (confirming commission). This is especially important if the goods are to be exported to one of the emerging markets. «Proposal for importer's request to issue a confirmed documentary credit»

Is it possible under a documentary credit to grant the buyer a period in which to pay but for the exporter to receive his money right away?

In the case of a documentary credit confirmed by UBS, which is available by acceptance of a draft drawn on UBS, the exporter can request UBS to discount this draft and thus receives the proceeds of the transaction on sight. This also applies to documentary credits confirmed by UBS which are available by negotiation and, under certain circumstances, for deferred payment documentary credits confirmed by UBS.

Are there clauses in a documentary credit restricting the exporter's assurance that he will receive payment?

It is important to beware of so-called "soft clauses" or "stop clauses". The exporter has little influence here and no real means of verifying if these terms of the documentary credit have been complied with. There may, for instance, be a provision for the documents to be issued or countersigned by the buyer. Should the buyer choose to delay or even prevent the issuance of the documents, the exporter has no means of verifying correct submission.